November 6, 2008 / 6:47 PM / in 9 years

Reports point to slowing economy

TORONTO (Reuters) - Details in a pair of reports on Thursday suggest the Canadian economy is softening, with purchasing activity increasing at a more moderate pace, while a surprise jump in building permits was due mostly to the volatile non-residential sector.

The reports are not seen as major indicators, and so reaction by the Canadian dollar and bond markets were muted, particularly ahead of Friday’s employment report.

But the numbers point to two sectors that have been key pillars of the Canadian economy during its expansion.

The value of building permits jumped unexpectedly in September, rising 13.4 percent and defying expectations of a 1 percent decline.

“Tighter credit conditions point to an increasingly conservative operating environment for the construction sector, which was reflected in the forecast for a continued contraction in building permits,” said Stewart Hall, an economist at HSBC Securities.

“As such, the significant rise in building permits seems out of context with the prevailing economic environment.”

The underlying details show that record institutional permits, mostly because of planned medical and educational buildings, are propping up the building activity.

Meanwhile, the data showed weakness in the residential building sector for a second straight month.

Statistics Canada said permits for non-residential construction climbed 41.7 percent, boosting the overall value. That gain for the volatile sector outweighed a 4.9 percent drop in the value of residential permits.

Meanwhile, the pace of increase in purchasing activity slowed more than expected in October, according to the Ivey Purchasing Managers Index.

The index, a joint project of the Purchasing Management Association of Canada and the Richard Ivey School of Business, slipped to 52.2 in October from 61.0 in September. Analysts had expected a reading of 56.0.

A reading of 50.0 indicates that activity remained flat from the preceding month, while a higher reading indicates an increase and a lower reading reflects a slowing or decrease.

The prices subindex moved to 78.5, rising for a second month, while the employment component slipped to 48.5, suggesting softer labor market conditions.

“On the whole, the report was fairly weak, and while it does not directly point to a contraction in the Canadian economy, it does suggest that economic activity may have softened. However, the spike in the prices sub-component is somewhat disconcerting,” said Millan Mulraine, economics strategist at TD Securities.

All eyes now turn to the October employment report, the highlight of the economic calendar this week.

After an unexpected surge of 106,900 new jobs in September, analysts surveyed by Reuters expect a decline of 10,000 in October, and for the unemployment rate to rise to 6.2 percent from 6.1 percent.

($1=$1.19 Canadian)

Additional reporting by Randall Palmer; editing by Rob Wilson

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